Discussion paper

DP13456 Systemic Bank Risk and Monetary Policy

The risk-taking channel of monetary policy acquires relevance only if it affects systemic risk. We find robust evidence of a systemic risk-taking channel using cross-country and timeseries evidence in panel and proxy VARs for 29 G-SIBs from seven countries. We detect a significant role for pecuniary externalities by exploiting the differential impact of monetary policy shocks on book and market leverage. We rationalize these findings through a model in which a fall in interest rates induces banks to increase leverage and reduce monitoring. In an interacted VAR, we find that macroprudential policy has a significant role in taming the unintended consequences of monetary policy on systemic risk.


Faia, E and S Karau (2019), ‘DP13456 Systemic Bank Risk and Monetary Policy‘, CEPR Discussion Paper No. 13456. CEPR Press, Paris & London. https://cepr.org/publications/dp13456